Sunday News Analysis: A Look Ahead To Corbett Budget II.

When Gov. Tom Corbett unveils his second budget Tuesday, Pennsylvania will be at least $500 million in the red — even after a year of spending cuts across almost every sector of state government.

The recipe for how the Republican administration got to that point includes a dash of deliberate policy decisions, a pinch of what critics claim are overly optimistic revenue projections and a heaping helping of a state economy that still hasn't rebounded to pre-recession levels.

Ahead of Corbett's speech to lawmakers, observers are bracing for more cuts — though no one could say where those might come. Public education, which took a $1.1 billion hit in the administration's 2011-12 spending plan, seems a likely target for 2012-13.

Five months before Pennsylvania closes its books on the fiscal year ending June 30, the state was running $497.2 million (about 3.5 percent) behind its projections, according to tax collection data released Wednesday by the state Department of Revenue.

Year-to-date tax collections are down in a variety of categories, including:

Personal income taxes, which were $211.5 million less than anticipated.

Corporate taxes, which were $287 million behind projections.

Inheritance taxes, which lagged projections by $11.3 million.

Realty transfer taxes, which are $9.8 million less than anticipated so far this fiscal year.

A bright spot came in sales tax receipts, which are $42 million, or eight-tenths of 1 percent more than anticipated.

The administration blames the economy for the lag in taxes. But other states are seeing collection increases. Critics say the administration was needlessly rosy in its projections.

The hazy outlines of the governor's 2012-13 spending plan began emerging last month. Early in January, Corbett announced a pay freeze for executive branch employees. Soon after, the administration announced it was freezing $160 million in spending for a variety of programs across state government.

"We have a lot of work to do," Corbett warned GOP foot soldiers during last weekend's state Republican Party meeting in Hershey. "This year's budget isn't going to be easy."

But for other states, it's starting to get that way.

In all, 43 states enacted 2011-12 general fund budgets that were higher than the year before, according to an annual fiscal survey prepared by the National Association of State Budget Officers and the National Governors Association.

Overall, those budgets account for $667 billion in general fund expenditures, up from the 2011 tally of $648 billion — still lower than the pre-recession level of $687 billion. Twenty-nine states enacted 2011-12 budgets that were lower than they were in 2008, the report found.

In Pennsylvania, lawmakers enacted, and Corbett signed, a $27.15 billion budget that reduced spending by 3 percent from 2010-11 levels

Rep. Joe Markosek, an Allegheny County lawmaker who is the ranking Democrat on the House Appropriations Committee, says his side of the aisle has been sparring with the administration for several months over the way it developed its revenue projections for 2011-12.

The Corbett administration is saying revenues are lagging projections. But Markosek said revenues now are slightly higher than last year.

"How good is the projection?" Markosek asked. "In any case, we're saying at this point, it's premature to really project a big deficit or any kind of surplus. Right now, the revenue is coming in slightly higher than it was in fiscal 2010-11."

Markosek's pronouncements mostly were backed up by a report by the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany, which shows state tax revenues nationwide during the third quarter of 2011 grew by a rate of 6.1 percent.

Pennsylvania took in $7 billion in general fund tax revenue during the third quarter of 2010, compared with $7.2 billion during the same time period in 2011, the report shows.

Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, acknowledges that the economy has slowed, hurting revenues. But she asks: "Is it their intent to make it look worse?"

Corbett's budget office bristled at the suggestion that the administration is playing games with its budget numbers, pointing out that its revenue estimates "were based on economic forecasts available at that time," spokeswoman Susan Hooper said via email.

"Since then, most economists [including the one used by the state] have significantly lowered their forecasts for economic growth in 2011 and 2012," Hooper wrote. "These downward revisions are consistent with the commonwealth's below-estimate tax revenue collections during the half of the fiscal year."

The Legislature's Independent Fiscal Office is making similarly conservative predictions about the years to come. In an inaugural report on economic conditions released last month, the new agency projected a 1.6 percent annual increase in state revenues into mid-2014. From then through mid-2017, revenues are projected to grow at a more robust 4.6 percent.

Critics say the administration could have helped the bottom line — at least regarding corporate tax collections — by not providing businesses $200 million in tax breaks. That included allowing businesses to write off the entire cost of their expenses in one year, rather than over several years. The practice is known as "bonus depreciation."

"That's added to the structural deficit," Ward said.

In defense of the policy, Hooper argued that the business tax cuts "allowed as many as 117,000 corporate taxpayers to increase capital investment, laying the groundwork for future economic growth." And, she said, the loss for "bonus depreciation" was included in the state's revenue estimates.

"What was not accounted for," she said, "is the fact that the economy has simply been much bumpier than anyone anticipated this fiscal year."

Hope you saw the editorial in Friday's Patriot about the impact of the self-inflicted bonus depreciation provision which was implemented without a vote.
The impact is over $250 million for the first six months of the fiscal year.
See the Independent Fiscal Office report, p.20, for their statement that the corporate tax revenue shortfall is mostly due to the "expensing" provision.
I'm one of the writers of the guest editorial.
717-816-7476 is my number.
thanks